Owing the CRA happens when you’re in business. No brainer, right?
It is, once you learn that this is how the system works.
For new, inexperienced solopreneurs in particular – such as those with home-based side businesses- it can be a shakeup to realize that you don’t pay taxes like you used to.
There’s no employer to deduct tax for you.
Moreover, if you haven’t tracked your expenses properly all year, the tax bill could be shocking.
You may recall our young masseuse Chloe from our last blog, Part 2 of The Single Biggest Mistake Entrepreneurs Make.
Having blown through most of her first-year profits and not bothering to keep receipts, Chloe’s budding career as a self-employed massage therapist could have met a premature end.
Good thing she had something saved (even if she hadn’t been saving it for taxes)!
At the end of the year, you will owe.
What you owe depends not only on your profits, but your deductions.
It’s here that business owners feel the pressure.
For some, missing write-offs, not keeping receipts, not claiming what they should, can end up making the amount of tax owing much higher than anticipated.
Things like a lean year, high personal or family expenses, fewer work days for medical reasons, employee turnaround, are a few of the common struggles entrepreneurs face.
If income is tight, it can be tempting to avoid those CRA obligations.
This can be overwhelming for some. Like a cliff with a steep drop that begins to feel much steeper.
When you owe the CRA, you will get a personal penalty of 5% tacked on to money you owe. There is a world of different penalties you could face on the business side.
The CRA consists of two important departments: Compliance and Collections.
Keep in mind, this relates to your business, not personal, taxes.
Compliance is about your due diligence. Following the rules, regulations and obligations. Acting in a timely manner.
You comply by filing taxes, telling them where your business stands, and reporting how much you owe.
Collections simply collects the money. You can negotiate and make payment arrangements.
In my experience, in the case of some of my Bookkeeping clients, Collections can be easy to deal with as long as you are compliant and continue to pay off what you owe.
If it becomes clear that a business owner is not working with the CRA, by no longer being compliant, or not making their payments, or any combination thereof, the CRA can take measures.
They can seize bank accounts, make phone calls – they need to know how much you’re making and what you owe.
They have a job to do, and you have a responsibility to them.
One thing is true about any debt. It has a snowball effect.
Even large corporations, like major retailers, fall into the trap.
We’ve all seen stories in the news about companies going under, employees stiffed on their pensions or severance, and company owners’ reputations being destroyed in the public’s eye.
This begins when businesses fail to comply.
Failing to comply seems to get easier as the situation becomes more and more overwhelming.
The one department you don’t want to be dealing with is Compliance.
I’ve heard some pretty terrible tales of nastiness and aggression from from former bookkeeping clients.
Filing your taxes keeps the Compliance demon away. Collections seem like a pussy cat compared to a Compliance Officer.
It’s a smart idea to set aside money throughout the year just for your business taxes. The best way to keep yourself out of the pit is never to dig it.
As I recommend to my E-School students, opening a separate bank account for tax savings is one of the best practices for small business owners. At tax time, you won’t have to worry!